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International Financial Statement Analysis Workbook, 2nd Edition by Michael A. Broihahn CFA, Anthony T. Cope CFA, Wendy L. Pirie CFA, Elaine Henry CFA, Thomas R. Robinson CFA

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CHAPTER 13

EMPLOYEE COMPENSATION: POSTEMPLOYMENT AND SHARE-BASED

SOLUTIONS

1. B is correct. The year-end benefit obligation represents the defined benefit obligation.

2. A is correct. The economic pension expense (in £ millions) is calculated as follows:

Change in benefit obligation £115
Benefits paid 1,322
Adjusted change in liability £1,437
Change in plan assets £673
Employer contributions −693
Benefits paid 1,322
Adjusted change in assets £1,302
Economic pension expense £135
Alternatively:
Underfunding, beginning of 2009 −£4,984
Underfunding, end of 2009 −4,426
Reduction in underfunding £558
Employer contribution £693
Less: Reduction in underfunding 558
Economic pension expense £135

3. A is correct. The economic pension expense is £135 million. Kensington’s reported net periodic pension cost for the period is £43 million. The difference is £135 million − £43 million=£92 million.

4. B is correct. The company’s economic pension expense is £135 million, but its reported net periodic pension cost is £43 million, a difference of £92 million. That amount must be adjusted for taxes: £92 million × (1 − 0.28)=£66.2 million. The economic pension expense is higher than the reported net periodic pension cost so net income would be adjusted down by about £66 million.

5. B is correct. The liability reported on Kensington’s balance sheet is £4,559 million. However, the funded status of the plan is £4,426 million (underfunded), the difference between the ...

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